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Banks' easy margin gains over
John Durie From: The Australian October 23, 2010 12:00AM

NEXT week the smallest members of the bank oligopoly, ANZ and NAB, will report combined full-year cash profits of around $9.4 billion.

That is up 27 per cent from year-ago levels, which once more will give oxygen to the bank bashers.

Forget the fact that the market will be more concerned with issues like slowing growth, and capital ratios under new international rules, and will be unimpressed by profit boosts driven mainly by falling bad debt reserves.

The bank results, including Westpac's the following week, will show that the big four have increased cash profits by some 70 per cent, from a combined $12.6bn in 2009 to $21.4bn in the 2010 year.

In the 2011 year, growth is slowing and the easy margin gains have gone, which explains why investors are lukewarm on banks.

Then again, when it comes to big banks and politics, facts are not the ammunition of choice.

The most disappointing aspect of the latest round is how politicians and regulators have taken the opportunity to jump aboard the news cycle for their own purposes and in doing so have once again displayed an alarming hypocrisy.

The Australian banking market is too concentrated and it enjoys too much mallet power -- but that is no basis for urging more regulation as the dynamic duo of Graeme Samuel and Joe Hockey did this week.

What the nation's leaders should be focused on is how to increase competition by lowering barriers to entry, and lowering bank costs by allowing more funding diversity through instruments like covered bonds.

These allow banks to ring-fence a portion of their mortgages to sell as triple A debt to international investors. Canada, some European countries, the US and New Zealand allow these instruments but not Australian regulator APRA.

It harks back to the banking rules put in place by the late Ben Chifley which say nothing must get between bank depositors and their money.

So 1950s thinking means Australian banks can invest in foreign covered bonds -- their New Zealand subsidiaries can issue them for up to 10 per cent of their capital -- but APRA boss John Laker says no way can they do it here.

Australian banks are double A rated and by issuing triple A rated paper could tap a new source of funds at lower rates to ease pressures on final consumer rates.

Somehow the Australian regulatory mindset is all about protecting unnecessary things which actually get in businesses' way.

The Reserve Bank has also fed the lunatic fringe by maintaining there is no evidence of increased costs to justify out-of-cycle rate hikes.

Just why the central bank feels the need to enter the political fray when it controls the political levers, and would actually benefit if the banks did raise rates next month, beggars belief.

CBA boss Ralph Norris is on record as saying his costs are rising by two basis points a month but the RBA says they are not.

ACCC boss Graeme Samuel's intervention was perhaps more surprising, backing Treasury officials' concerns that the banks are too concentrated and price signalling by making speeches about the need to raise rates.

This is a long-seated concern of the competition regulator, dating back to court losses in petrol cartel cases.

The courts held that if one station owner rings another to advise of a price hike tomorrow and the second player raises rates, the ACCC has to prove he did based on that phone call, or more to the point, that there was a meeting of minds.

This minefield of so-called facilitated practices also concerns international regulators and ACCC commissioner Jill Walker heads off to Pais next week as part of an OECD discussion on how best to co-ordinate international rules in the areas.

European law offers a defence if there is a legal business purpose for the price signal.

It is a moot point among Australian practitioners. Blake Dawson's Stephen Ridgeway agrees the ACCC lacks some power but urges caution in what is done to the law. Other lawyers argue the ACCC should define what exactly is wrong and what its change will do about it before rushing into any new regulation.

Former minister Craig Emerson circulated a paper earlier this year which has gone nowhere but his replacement, Stephen Bradbury, is making his own soundings on possible changes.

Public comments by bank chief executives are a perfect case in point.

When Ralph Norris, Gail Kelly or their comrades answer questions or float rate rises it would seem they are more trying to soften the blow for their customers and, ironically enough, the politicians. The reality is that when one bank in Australia moves rates, the rest follow within minutes in lemming-like fashion.

If Samuel had more power, how would he claim that Kelly was not talking about rates for a legitimate business purpose?

He couldn't, and the fact is this week's outburst was a case of hopping on the latest news cycle in a blatant grab for more power.

Banks and petrol are easy targets used by regulators to increase their power.

The ACCC, Treasury, the RBA and APRA all approved Westpac and CBA's recent acquisitions, yet now say the big banks have too much power.

They should ask themselves who is to blame.

If Samuel had the power he wanted he surely wouldn't consider shutting down a speech by ANZ boss Mike Smith because he was price signalling.

The concept of Australia Post becoming a bank is of course nonsense but present boss Ahmed Fahour has previously flagged in his submission to the Cooper review the concept of providing back-office support for the superannuation industry. Right now his big growth driver is logistics and parcel deliveries.

More competition is needed and the banks need more funding choices, and both of these would actually help the economy.

More regulation would have the reverse effect.

Barnstorming

IN this week's Senate hearings ACCC boss Graeme Samuel also confirmed he was investigating claims ACT-based retailer SupaBarn was using restrictive lease covenants to keep competitors out of Civic in Canberra's CBD.

Woolies and Coles have long complained they were being shut out of Canberra while the small fry Supabarn was allowed to use anti-competitive practices.

Loophole time

AS annual meeting season winds up, Canberra should keep a close eye on company loans used to fund executive options.

There was an attempt to fix loopholes last year but the new tactic is to lend money to executives to buy low-priced options.

For example, a company could lend someone $10 million to buy 10 million $1 options which would mean the purchase was not a share grant but a loan, so any gain in the price of the option would be taxed as capital gain not as income. As such it would attract a lower tax rate.

Last stop no longer

THE Singapore-ASX merger will lower the barriers to more international share investments by Australians but many doubt whether it will achieve this aim.

The idea is to have bigger pools of capital, allowing more product development and driving Australia closer to Asia.

Singapore exchange boss Magness Bocker used to run technology group OMX, so he is a big proponent of global capital pools.

Outgoing ASX boss Robert Elstone has long been a sceptic but he used Bocker's technology, and now that he is going, chairman David Gonski has accepted the overtures.

As a company Singapore is some 40 per cent bigger than the ASX but its stockmarket is half the size of Australia's, which may tell you Singapore is doing something right.

Synergy benefits are not driving this deal -- instead it's cross-border mergers and getting Australia linked in to the world, having been in danger of being the last stop on the train line.